6 Reasons To Buy This Tata Group Stock That Has Fallen 28%, Is Repaying Debt & Has A Stock Split

Updated: Saturday, May 14, 2022, 10:07 [IST]

It's time to look at stocks that have tremendous value and where interesting developments are taking place. An era where investors were chasing growth over value may come to an end. Stocks that were loss making, but, had a growth story to tell are no longer in the reckoning. Such stocks have been sinking of late and some of them have destroyed investor wealth. Here is a stock from the Tata Stable we believe has tremendous value and is a pick at the current levels. Here are 6 reasons we believe the stock is worthy of a buy at the current levels.

1. Company is repaying debt

One of the big reasons to be buying the Tata Steel stock is that the company is reducing debt substantially. We are living in times when interest rates are headed higher. This will increase the cost of borrowings for highly leveraged companies or companies that have high debt on their books. Tata Steel is repaying debts and this is a big reason to buy the stock. The company has generated free cash flow of Rs 27,185 crores and has reduced its net debt by 32% in FY22. We believe that the company will continue to have good cash generation on the back of elevated steel prices. This means that its debt reduction programme would continue. The company repaid debt of Rs. 15,232 crores in the last 12 months, and the now the net debt to EBITDA at 0.8 times, which is reasonable.

2. Dividend and stock splits at the company

The second reason to be buying the shares of the company is its solid dividend of Rs 51 per share, which translates into a yield of more than 4%. Now apart from this, the company has also declared a stock split in the ratio of 10:1. This means after going ex-split, the shares would become cheaper for investors. So small investors can buy into the stock, thus enhancing the liquidity. This is one stock, where a stock split was definitely warranted.

3. Robust financial performance

The third reason to be buying the stock of Tata Steel is its solid financial performance. Production crossed 19 million tons for the first time, 13% YoY increase. Tata Steel also reported a solid net profit of Rs 9835 crores for the quarter ending March 31, 2022. The company declared the highest ever annual EBITDA of Rs 63,830 crores. Tata Steel also reported the highest ever annual delivery volumes at 18.27 million tons. Now apart from this, growth at the company would continue because of strong steel demand in India and Europe. The company is undertaking a 5 MTPA expansion which is on track and the NINL acquisition will close in 1QFY23, which should boost revenues further. Pellet capacity will also increase from 7 to 13 MTPA and so will the iron ore mining capacity.

4. Steel demand to remain robust in India and abroad

The fifth reason to be buying the stock of Tata Steel is that fundamentally the stock remains cheap. Tata Steel managed an EPS of Rs 271 for FY 2021-22. Now, the stock is trading at Rs 1090, which discounts the EPS 4 times. With the company constantly undertaking a debt reduction programme and with steel prices continuing to remain elevated, we believe that the fundamentals of the company would be only getting better.

5. Valuations of the stock remain cheap

6. Stock has dropped 28% from 52-week highs

The last and the final reason to buy the shares of Tata Steel is the 28% fall in the stock price from 52-week highs. The shares of Tata Steel have fallen from levels of Rs 1534 to the current levels of Rs 1094, which is a drop of 28% from highs. With the stock available with stock split and dividends, we would recommend a buy. The only risk for the stock right now is that if the markets fall, the stock could also drop in tandem.